Analysis: U.S. solar-sector growth hinges on financing quest

NEW YORK/LOS ANGELES (Reuters) - The U.S. solar energy industry is having its best year ever, yet financing remains scarce for the billion-dollar projects needed for America’s solar sector to gain ground on global leaders such as Germany.

For the U.S. solar industry to ramp up from a rooftop add-on technology to the scale of fossil fuel power plants, the country needs to build large plants covering hundreds of acres. Each can cost upward of $1 billion, a huge sum for the nascent industry to finance, even with U.S. government incentives.

“Because the debt market is so thin right now, it is very difficult to find lenders who are able to lend long-term,” said Scott Frier, chief operating officer of Abengoa SA’s Abengoa Solar, which has two big U.S. plants under development.

Just last week, doubts arose about the largest thermal solar plant under development, the 1 GW plant proposed in Blythe, California, by Solar Trust of America, a partnership of Solar Millennium AG and Ferrostaal AG.

The company warned its federal loan-guarantee application was taking longer than expected.

U.S. solar sales are on track to reach about 1 GW this year, equivalent to one nuclear reactor. While solar panel makers and project developers are optimistic the country could become the world leader by the middle of the next decade, the U.S. industry remains far behind other countries, especially Germany.

Globally, solar installations are expected to reach 14 gigawatts this year. At least half of that will come in Germany, where developers have rushed to build projects ahead of cuts to financial incentives.

GOVERNMENT BRIDGE

The U.S. government has two key programs to help the industry: a cash grant that pays 30 percent of project costs for plants under construction by December 31, and a loan guarantee program that covers up to 80 percent of project costs.

Applicants to the loan guarantee program have complained the process is too lengthy and murky, leading to just a handful of projects winning approval.

This summer, Abengoa won a $1.45 billion loan guarantee for its 280-megawatt solar plant in Gila Bend, Arizona. Regulators are paging through applications for other projects, including a cluster of plants in California that would provide more than 4,000 megawatts of power.

Experts say it is unlikely all the proposed projects will be built, in part because of high financing costs.

If big banks are willing to get involved, their lending rates run about 8 percent, roughly double the level of the government rate.

Still, some bankers say developers, looking to keep the favorable government programs alive, have been exaggerating the difficulties of lining up bank financing.

“There is commercial project financing available,” insisted Jonathan Yellen, managing director for infrastructure and project-finance at Deutsche Bank. “Renewable energy is attracting a large and growing portion of the available capital.”

The erosion of another key financing tool, the tax equity market, during the 2007 banking crisis, also dried up a significant pool of capital for projects.

In that market, companies developing solar projects sell future U.S. tax breaks for renewable energy to a financial partner who, in turn, applies those credits to its own tax bill. By paying up front for the tax benefit, the financial sector provides the developers with cash to build projects.

While major banks have recovered from the worst of the recent crisis, their appetite for tax equity remains a fraction of what it was in 2007. Two of the biggest players in the market at that time were Lehman Brothers, now defunct, and insurer AIG, which needed a bailout and has sharply cut its operations.

Tax equity market interest is beginning to emerge again, and should grow, especially as solar makers continue to cut costs for the systems, one executive said.

“We have a model that’s gone around the world of countries paying too much for solar,” said Eric Hafter, head of U.S. operations for Sharp Solar, a unit of Sharp Electronics Corp.

“As we come out of this recession and the tax equity looks for a safe place to park, (money) will, I believe, flood into solar,” he said.

Thin-film photovoltaic solar maker First Solar has more than two gigawatts of solar power plants on the drawing board, but the Tempe, Arizona-based company will not develop those plants until it has a buyer in place.

The company, the lowest-cost producer of photovoltaic modules that turn sunlight into electricity, financed the construction of the nation’s largest PV plant, a 21-megawatt facility also in Blythe, California, before it sold it to power company NRG Energy. But First Solar does not plan to finance construction of other plants, such as the 290-MW Agua Caliente plant slated for Arizona.

Reporting by Matt Daily in New York and Sarah McBride in Los Angeles; Editing by David Gregorio and Jan Paschal